Where Does The Dow Go Next? Onward, Upward Or Downward

JACK NEASE Commentary

February 18, 1997|JACK NEASE

Say it as many times as you want: 7,000 is just a number.

But there is no denying that what has happened in the stock market in recent years is extraordinary. The fact that the Dow Jones industrial average passed 7,000 last week merely calls attention to the market's phenomenal rise.

Only twice before in the history of the U.S. equity markets have stock prices gone up so far so fast. One time was in the 1920s. The other was in the 1980s.

The bull market of the twenties ended in disaster - the crash of 1929 and the Great Depression of the thirties.

The bull market of the eighties did not end as badly. Stock prices fell sharply in 1987, but quickly recovered and the upward advance began again the next year.

What's ahead?

Is the United States headed for a Japanese-style straight-up, straight-down market that could damage the economy for many years to come? Or is the market merely reflecting a sound economy, one that is growing slowly but steadily without increased inflation?

Consider some history.

-- Between October 1923 and September 1929, the Dow soared almost 345 percent before the 1929 stock-market crash ushered in the Depression.

-- Between August 1982 and August 1987 the Dow surged 250 percent.

-- Since October 11, 1990, when this bull market began, the Dow has gone up slightly less than 200 percent.

Thus this six-year bull market is the longest in U.S. history, but not nearly the steepest in upward ascent.

(Bull and bear market designations are arbitrary, of course. Different analysts use different definitions. I'm using the one that counts the beginning and the end of a bull market as a period in which there has not been a 20 percent decline. In this bull market, there hasn't even been a 10 percent correction, if only closing prices are used in the calculation.)

Betting on the future

But all that is history. Investors want to know what happens next.

Upward and onward, say the optimists. Louis Rukeyser of Wall Street Week fame is telling his newsletter clients the market will go higher. "Remember that stock prices are at bottom a bet on future earnings," he wrote recently.

"Recent reports have been dominated by pleasant surprises, and therefore the market's vigorous start to 1997 has been anything but irrational."

And Prudential Securities' Ralph Acampora, who a couple of years ago correctly predicted the Dow would pass 7,000, is now predicting it will pass 8,000 within a year.

But after that, he notes, there may be danger.

A market that goes up too sharply can fall sharply.

My contention is that nobody knows such things. All we can do is say is that if current trends continue, then ...

But current trends never continue forever. Something unexpected usually happens. Saudi Arabia cuts off the U.S. oil supply. Iraq invades Kuwait. War breaks out in ------. You fill in the blank.

The exception was in 1929. No outside event caused the 1929 crash. Speculation had driven stock prices so high that even a small increase in interest rates by the Federal Reserve system proved too much.

Too much of a good thing

Similarly, no external event caused the Japanese market to fall and its economy to sink into recession.

Instead, the Japanese equivalent of our Fed decided Japanese real estate prices had grown too high and attempted - by raising interest rates slightly - to slow things down. Even this little tap on the economic brakes proved too much for an economy and a stock market based upon untested optimism.

Fed Chairman Alan Greenspan has spoken of "irrational exuberance" in stock markets and the Japanese stock market "bubble" that lead to an economic bust.

He's said the Fed shouldn't be concerned about stock market prices unless they could damage the economy.

To date, he hasn't said when or how that point will be reached.

So U.S. investors may be wise to hope the market continues going upward - but not so far up that Greenspan and his colleagues begin to worry.

Sun-Sentinel columnist Jack Nease comments on business issues affecting South Florida on Sunday, Tuesday and Thursday.